What Is the Regulatory Framework Governing a Dormant Company?

Introduction 

The regulatory framework governing dormant companies is provided under Section 455 of the Companies Act, 2013 and Companies (Miscellaneous) Rules 2014, a dormant company registered under this Act refers to a company that is inactive or not carrying out any business activities. These companies can apply to the Registrar of Companies (RoC) to change their status from “Active” to “Dormant.” The reason for such a change is that it gives the company the liberty to start its business activities after a few years rather than incorporating a new company at that time, thus providing cost and time advantage to the company. A company may choose to temporarily shut down its operations due to adverse market conditions and decide to commence its operation at a future date. The company must apply with the Registrar of Companies (RoC) along with the required documents and maintain a minimum number of three directors in the case of a public company, two directors in the case of a private company and one director in the case of a one-person company. Such dormant status can be retained for up to five years after this the Registrar of Companies may strike off the name of the company from the Register of Companies if such company fails to comply with the provisions of Section 455 of this Act. In Re: AVS Enterprises Pvt. Ltd. vs. Registrar of Companies, Delhi & Others[1] emphasised that a company can secure dormant status by passing a special resolution in a general meeting and all conditions specified under this Act are complied with before applying for dormant status and the registrar must ensure that a company must not have any significant financial transactions and must comply with the filing requirements for the application.

Meaning of Dormant Company 

A dormant company is a company that is inactive or inoperative or not carrying out business activity after a few years of its incorporation. Such a company has applied to the Registrar of Companies (RoC) to change its status in the Register of Companies from “Active Company” to “Inactive Company.” The reasons behind obtaining this status are holding assets or intellectual property, temporarily pausing operations due to market conditions or preparing for future business. A dormant company is considered “inactive” if it has not conducted business, made significant accounting transactions or filed financial statements in the last two preceding financial years.

Advantages of Dormant Companies 

The status of dormant companies offers various advantages to its promoters. Some of the main advantages are as follows:

• It helps to retain the domain name so a company may be founded to prepare for a future project.
• A dormant company offers a good advantage to promoters who want to hold an asset or intellectual property under its entity name and use it later. For instance: a trademark of a company and if a promoter wants to purchase land now for a future project, so that he can use the land for the future project of the company.
• Once the company obtains the status of the dormant company, the annual return for the company can be filed using a simplified Form MSC-3[2]. Also, the number of board meetings to be conducted by the company and the burden of compliance are reduced.
• The dormant company is not liable to pay any taxes during its inactive status.
• The dormant company is not required to include the cash flow statement in its financial statement.
• Dormant companies enjoy the advantages of less statutory compliance as compared to active companies. For instance: a dormant company need not hold an annual general meeting every year.
• It is easier for dormant companies to require their active status, and it also reduces the cost of new incorporation of the company.

Procedure to Obtain the Status of a Dormant Company 

As per the Companies Act, 2013, the company can obtain the status of dormant company suo-moto or the Registrar of Companies may declare a company as a dormant company if a company has not filed financial statements or annual returns for two financial years consecutively. The registrar of companies shall check certain approvals and documents before granting the status of a dormant company as per Rule 3 of the Companies (Miscellaneous) Rules, 2014, such as board resolution, special resolution (consent of 3/4^th shareholders of the company), copy of Memorandum of Association, consent of lenders (if any loan is subsisting), statement of affairs duly certified by a Chartered Accountant or Auditor, latest financial statement and annual return, no objection certificates from regulatory authority, etc. The Companies Act read with the above-mentioned Rules stipulates the following step-by-step procedure for obtaining the status of a dormant company-

• Convening a Board Meeting: The Company shall prepare a notice of board meeting along with a draft resolution to be passed in the board meeting and send it at least 7 days before the date of the board meeting as per Section 173 of this Act[3]. In the board meeting, prepare a draft notice that may be sent to shareholders for holding a general meeting and fix the date, time and place for the general meeting. The company shall obtain a statement of affairs from the auditor of the company. This statement shall give the financial position of the company.
• Convening a General Meeting: The Company shall hold a general meeting at the appointed date, time and place as per the notice calling the said meeting. The company shall pass a resolution for obtaining the status of a dormant company and authorise the directors to make an application to the Registrar of Companies, the consent of shareholders should be at least 3/4^th of the shareholders holding of shares in value.
• Filing of Forms: After the special resolution, the company shall file Forms MGT-14 and MSC-1 with the Registrar of Companies along with the explanatory statement, a copy of the statement of affairs, a declaration by the directors and other necessary documents within 30 days from the date of passing of the said resolution.
• Issue of Certificate: After verifying the merits of the application, the Registrar of Companies shall issue a certificate in Form MSC-2 and allow the status of a dormant company to the applicant.

Compliance Should Be Followed by the Dormant Company 

Certain compliances that need to be followed by the Dormant Company are:

• The dormant company needs to have a minimum number of directors, i.e. at least 3 directors in a public company, at least 2 directors for a private company and 1 director for a one-person company.
• The dormant company is required to convene at least one board meeting every half year and the time gap between two meetings shall not be more than 90 days.
• The maximum tenure for which a company can remain dormant is 5 consecutive financial years. If the company remains dormant for more than 5 years, the registrar strikes off the name of the company from the Register of Companies.
• The company is required to file a “Return of Dormant Company” in Form MSC-3 annually indicating financial position duly audited by the Chartered Accountant along with a specified fee within 30 days from the end of each financial year and can take exemption to file cash flow statements in its annual accounts.
• The provisions of rotation of auditors are not applicable in dormant companies.

Revocation of Dormant Status of a Company 

A dormant company can regain the status of an active company. Section 455 of this Act, read with Rule 8 of the Companies (Miscellaneous) Rules, 2014 lays down the provisions for seeking the status of an active company from a dormant company. An application shall be made in Form MSC-4 with the Registrar of Companies before the end of 5 consecutive years from the date of becoming a dormant company.

Conclusion 

A dormant company under Section 455 of the Companies Act provides an effective mechanism for companies that are temporarily inactive or not engaged in business activities. After obtaining the dormant status, a company can retain its assets, intellectual property and domain name while reducing compliance requirements and costs. There is a certain procedure for obtaining the dormant status that should be followed by the company. During the dormant status, companies have benefited from simplified filing and reduced obligations. The company must ensure that it meets all the regulatory requirements and file annual returns to maintain its dormant position. However, the company can regain the active status within a specified time frame.

[1]  [2021] NCLT Co. App. 47.

[2]  [ICSI] Company Law & Practices 516.

[3]  The Companies Act, 2013 (Act of 18 2013), s. 173.

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